A Snapshot From Phil Leggiere

Toutiao, a popular mobile news aggregation application targeting low-end smartphone users in lower-tier Chinese cities, has gained momentum among advertisers, but its longer-term prospects may be limited because of intensifying government scrutiny about content and growing competition from Baidu and Tencent.

The privately held company claims its advertising revenue hit more than 10 billion yuan ($1.5 billion) during 2016 and has amassed 80 million users in China’s lower-tier cities. Toutiao’s impressive growth, according to OTR sources, has come in large part because its software is bundled with many of the low-end smartphone models popular in lower-tier cities. “Toutiao’s application is preinstalled on most inexpensive smartphones at the low-end of the market, and this has helped the company to gain users and traffic,” said one source.

Sources also said advertisers targeting lower-end markets were attracted by Toutiao’s relatively low prices. One executive said, “All of Toutiao’s news feeds are bought through programmatic buying, so their pricing is all acceptable.”

Toutiao Facing ChallengesDespite its strong growth momentum, Toutiao is facing several challenges that could hurt the company’s longer-term advertising revenue in 2H17 and beyond, according to some sources.

First, Toutiao is coming under increasing scrutiny by the Chinese government for violating copyrights owned by other news outlets and for not trying hard enough to monitor its content to eliminate pornographic and violent material. “Toutiao has a poor reputation among quality users and users in China’s tier-1 cities and tier-2 cities due to a significant amount of violent and pornographic content,” a source said. Some sources also said larger advertisers were beginning to hold off further spending with Toutiao because of concerns around associating their brands with the news feed.

Toutiao also faces increased competition as large ecommerce players including Baidu, Tencent and others move to create their own news feeds. One advertiser said, “Among all the news feed platforms, Tencent content quality and traffic flow is currently the best.” OTR Global’s February note reported Baidu’s news feed was at its initial stage.

Sources said news feeds from Baidu and Tencent have an advantage over Toutiao because they already have a large user base, connect people through their social media applications and have better subscriber retention rates. “Chinese smartphone users change their device once a year, and Toutiao loses a customer every time a subscriber changes their phone,” said an advertising agent. “Then Toutiao has to fight to try and get that user back.”

Contributor: Robbie Scott

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